Cayman has a thriving urban hub, replete with shops and offices, restaurants and residential development. When the sun sets, night time activity comes alive. It is vibrant and walkable. It is, of course, not George Town. It is Camana Bay.
Despite the contrast between Camana Bay’s growth and
downtown’s struggles, and contrary to popular perception, local real
estate brokers say the Dart Group isn’t killing off downtown George Town
Rather, concurrently with the global economic downturn, Camana Bay has elevated competition in the commercial leasing market, leading to significant differences in the occupancy rates of buildings, depending on their quality, and independent of location.
Camana Bay’s success
“The commercial office space market in Cayman has experienced significant vacancies in the last 24 months for the first time in 30 years.
“The commercial market here has typically always been under-supplied due to the naturally conservative stance of the local developers and the lack of really aggressive bank financing options often found in North America and elsewhere,” Ollie Collins of IRG said.
“This has meant that landlords on the Island have been accustomed to vacancy rates below 3 per cent with rents only having increased for nearly 30 years straight.”
He said, “Dart Realty changed the market considerably towards the end of the last decade with their commercial space build out at Camana Bay. They have built true Class A office accommodation on a campus type development, which had previously not been seen in Cayman.
“With nearly 300,000 square feet of space built out they have over 10 per cent of the total office space market and nearly 30 per cent of the Class A office space market.”
Due to Camana Bay’s standard and quality, it has managed to increase Class A rates to US$50 per square foot per year, not including maintenance and common area maintenance, he said.
Rick Cobb, director of leasing for Dart Realty, said, “Camana Bay has just over 260,000 square feet of completed office space with a 90 per cent occupancy rate.
The newest building, 94 Solaris Avenue, now under construction and opening mid-2012, will add an additional 50,000 square feet and is 75 per cent pre-leased. Current office availability ranges from smaller offices up to full floors.
Plans for future office buildings are driven primarily by corporate occupier demand and therefore the type and size of the buildings are influenced by those requirements and could range from small offices up to full floors or entire buildings.”
Camana Bay is home to 18 financial services firms, with Aon and Mourant Ozannes relocating to the development in 2012.
In general terms, the difference between Class A (or first class) and Class B (or second class) office space is the amount of money tenants are willing to pay for the space.
In Cayman, Class A space is distinguished by being newer (or kept updated), with modern electrical and mechanical systems, and most importantly being hurricane-rated, with proper windows and backup generators so the office can get up and running again immediately after a storm.
The importance of storm protections was brought into relief by the path of devastation wrought by Hurricane Ivan’s landfall in September 2004.
“Today’s corporate occupier is reaping the benefits of a wider selection of new, competitive products able to accommodate more stringent technical requirements. One example of this would be that after Hurricane Ivan there was a clear demand for hurricane rated design and construction, higher minimum ground floor elevations for optimal business continuity, on-site back up power supply and fibre optic networks, among other requirements,” Cobb said.
Downtown’s class division
In essence, Camana Bay has set a new standard for commercial office space, and developments that are able to meet that standard are flourishing also, while those that are not are being left behind.
“While it may be true that Camana Bay has had an impact to the vacancy rates in town that is not the whole story.
“With total vacancy rates for the market approaching 15 per cent it is clear when studied in more detail that this vacancy is concentrated in the Class B market more specifically the older buildings to the north side of town,” Collins said.
“This has shown in the asking rates for Class B space, which on average have declined from around US$32-US$38 to now US$26-US$35. Vacancy rates for Class A buildings in town are still below 3 per cent with asking rates having increased over the last 24 months by nearly 10 per cent.”
Given the strong demand and rising rates for Class A office space, a potential opportunity in the downtown commercial market is acquiring older Class B or C buildings and upgrading them to Class A, Collins said.
Billy Culbert of Rainbow Realty said landlords have been reticent to invest in their older buildings years ago because they did not have to in order to keep them rented out, and recently because of the slowed economy.
“We’ve been dealing with a lot of landlords who have office space who don’t want to spend more money right now. They’d rather rent it at cheaper rates,” he said.
At the same time, though, the slowed economy has suppressed interest rates, meaning low debt-service costs on new Class A buildings, and in turn, relatively low rents for tenants in exchange for quality accommodations.
“If someone wanted first-class office space, there would never be a better time to rent it. Landlords are quoting rents that reflect the cost of capital and competitiveness of the marketplace,” Culbert said.
Culbert said he is seeing signs of landlords becoming more willing to upgrade their older buildings.
For instance, his office is on the waterfront in Harbour Centre, which his company purchased about three years ago and “completely revamped” with generators and mechanical systems.
In a different context, contractors for Appleby Cayman broke ground in early 2011 on a new 80,000-square-foot, six-storey Class A office building to complement the firm’s existing buildings on Fort Street.
Collins said for the most part downtown landlords have the money to reinvest in their buildings, and that the deterioration of quality is a product of poor reaction to changing market conditions.
“It’s not a case of lack of capital. It’s a case of not being fully aware. This has caught them by surprise in a way, over the last year, 18 months,” he said.
“They think this is a normal market, with a bit of a slowdown. Camana Bay is highlighting deficiencies in downtown.”
Instead of Camana Bay, Culbert pointed to the construction of the Government Administration Building as the most direct factor impacting the downtown office market, as government entities move en masse from various Class B buildings to the Class A space on Elgin Avenue.
“That’s probably affected the market more than anything,” he said. “They have come out of a lot of the second-class office space.”
Willow blossoms on Elgin
In addition to the Government Administration Building, the Cricket Square development also offers new Class A space in George Town.
In the summer, construction began on the development’s fifth phase – a 58,600-square-foot office building called Willow House.
With a scheduled completion date of the third quarter of 2012, Willow House will join the existing four commercial buildings on 6.5 acres of Cricket Square, including The Pavilion, Century Yard, Boundary Hall and The Brasserie.
Cricket Square developer Clarence “King” Flowers said Willow House will be an updated version of Boundary Hall.
When building Cricket Square, the primary consideration was hurricane resilience, he said, adding that Willow House will incorporate the same level of storm protection as the Government Administration Building and Citrus Grove on Goring Avenue.
Construction of Cricket Square began before Hurricane Ivan landed, and when it did, it dramatically altered the emphasis on storm protection. “Hurricane Ivan changed everything,” he said.
After hurricane rating, the most important factors were parking availability, competitive pricing, security and amenities, in no particular order, he said.
The Cricket Square product is specifically oriented to commercial tenants, rather than trying to be all things to all people, he said.
“We are offering a high-efficiency work environment, with good food, a good gym, and good meeting facilities,” Flowers said. “Our core facilities, we feel, are helpful and conducive to high performance in the office place.”
Collins said, “The strength of the Class A market in George Town is clear with the breaking ground of Willow House, the new building at Cricket Square.
There has been strong demand for Willow House with the building already over 30 per cent preleased at comparable rates to Camana Bay.
It would be fair to say that the “Elgin Avenue Corridor” still has extremely strong demand for office space from companies based on Island and new companies relocating here.”
Relative strengths, weaknesses
Camana Bay and George Town have inherent advantages and disadvantages to prospective tenants.
Camana Bay is a fully integrated, walkable, new-urbanist, multiuse, top-quality environment with residences, retail and a movie theatre.
George Town, on the other hand, offers immediate access to government, courts, airport, harbour and hospitals – assets that are essential to many commercial clients.
“George Town is the capital. It has been the capital. Just look around,” said Flowers from his Cricket Square office, gesturing toward the government headquarters a stone’s throw away.
“This is what I use to pitch what we have. Look next door.”
It shouldbe noted that Dart has not placed all of its real estate eggs in the Camana Bay basket. It also owns Regatta Office Park further north in the Seven Mile Beach area, on Lime Tree Bay Avenue.
The development has 127,000 square feet of office space with a 97 per cent occupancy rate, and a selection of smaller offices currently available, Cobb said.
Dart also owns two buildings on the waterfront in downtown, The Island Plaza and the Flagship Building.